Year-End Tax
Strategies
To Make Uncle Sam Look Like Santa By Janet
Attard
Here's
a novel thought. Let
Uncle Sam pay for your holiday gifts and entertaining.
No,
I’m not talking about anything illegal. You cannot buy personal gifts
and bill them to your business. That's called fraud. But if your business
uses the cash method of accounting (as most sole proprietors do) you may
be able to legally cut your tax bill by hundreds or thousands of dollars
by making a few strategic decisions for your business between now and the
end of the year.If you are a
sole proprietor, those tax savings may more than cover your holiday
spending.
Here's
how to make it happen.
Estimate
your profit or loss for this year and next Your net earnings and your adjusted gross income (AGI) will determine
eligibility for many deductions. So, the first move you need to make is to
estimate your net business income and personal AGI for this year and next.
Why
both years? Well, it's not unusual for business owners to have
considerable year-to-year differences in income, sometimes due only to
when a couple of big customers get around to paying bills at the end of
the year.
A
typical example: you are a consultant and author.You found a publisher for your
book in October of 1999 and agreed on terms, but by the time the contract
was actually signed and all the paperwork made it through accounts payable
at the publishing company you didn't get the first half of your advance
until the first week in January. You finished the book in 4 months, and
the second half of the advance arrived promptly.So, instead of an extra $5,000
income you had expected to have in 1999 and $5,000 in 2000, you wound up
with all $10,000 in 2000.
To
make the tax situation worse, you did a series of Internet training
seminars for a government agency in 1999 and there was a typo in the
contract number you included in your invoice. It took months to determine
why you weren't paid and then to fix the mistake, so the $6,000 you were
expecting in 1999 didn't arrive until February of 2000. And now you've
just signed a deal with a large corporation for a $24,000 project, and
under your normal working arrangements, one-third of that amount is
required to start their project. Oops.. if they get that out on time, add
another $8,000 to this year's income.
Bottom
line: you have $22,000 more in income than you had last year, and about
$16,000 more than you expect to make next year.By the time Uncle Sam and his
state and local cousins get done nibbling away at the $22,000
"windfall" you had this year, you may only have half of it left.Ouch! That's quite a bite.
Time Your Equipment
Purchases
To Maximize Tax Deductions
Under section 179 of the tax law you
can choose to expense (deduct) a certain amount of equipment, furnishings
and other capital expenditures in one year, instead of depreciating them
over time. For the year 2000, the amount of such purchases you can deduct
is the lesser of $20,000 or your earned income. That maximum 179 deduction
goes up to $24,000 for 2001. (See the important notes below)
You
can save considerably on your taxes by timing equipment purchases to take
maximum advantage of the section 179 expense election. Here are two
examples to show you how.
Scenario 1
You
are a new business owner. It took a while to get going, but you finally
started landing customers this fall. Still, it looks like you'll show a
quite a loss for this year, and you had no other earned income.With the work coming in from the clients you did land, you
have enough money to buy that top-of-the-line notebook computer. Total
cost (with the 25 gig hard drive, extra battery, swappable DVD drive and
15-inch monitor: about $4,000.If
you make the purchase this year, you will have to depreciate the expense
over the next five years. Assuming you make a healthy profit next year, by
waiting until January 2 to purchase the computer you'll be able to deduct
the entire cost in one year.
Scenario 2
It’s
been a good year. A very good year.Profits
are high and you want to reinvest them in new equipment to grow your
business even more.You've
already spent $8,000 on items that qualify for the section 179 expense
election and you want to purchase two powerful new Internet servers
because your web site is growing rapidly. The total cost will be $22,000.If you buy both servers this year,
you're total equipment purchases for the year will come to $30,000 –
that's $10,000 more than you can deduct in 1 year even if you have the
income to support the deduction. So, you would only be able to expense one
of the servers (plus the other $8,000 in equipment previously purchases)
this year. The cost of the other $11,000 server would have to be
depreciated over 5 years.So,
next year and each year after, you'd only be able to deduct a little more
than $2,000 of the cost of that second server.
However,
if you buy one of the servers thisyear
and one on January 2, you would be able to expense the full cost of the
one server in 2000, and the full cost of the second server in 2001,
assuming you had sufficient profit to make you eligible
and that your total 179 deductions were under $24,000 next year.Deducting the total cost in one
year could save you over $4,000 in taxes for 2001.
Important notes
The small print: If you've purchased more
than $200,000 in equipment during the year the amount you can deduct
is reduced by each dollar more than $200,000 of equipment you've
purchased.
If yourspouse has a business and also
buys equipment and you file a joint return, you are treated like one
business for the purposes of section 179. In other words, the combined
amount that can be expensed for 2000 is $20,000, not $40,000.
A bit of relief: You can't use the deduction
to create a loss; however, if you are a sole proprietor, any income,
even income from a job you have as an employee in someone else's
business is considered earned income.
When all else fails: If your equipment purchase
doesn't qualify for the section 179 expense election, it can be
depreciated over it's useful life. So you don't lose everything –
just the ability to deduct everything in a single year.
Other tools and
business "toys"
If
you had a windfall year, computers aren't the only things you can use to
reduce the tax bite. Any piece of equipment or gadget which you will
legitimately use in your business can be deducted (up to the limit
describe previously). So if you are projecting a sizeable profit you may
want to consider buying any of a wide variety ofproducts for your business before
the end of the year.. Among them: a digital camera; a lightweight portable
projector that hooks to your notebook (for showing PowerPoint
presentations, for instance); a business card scanner, a digital recorder,
new ergonomic furniture; new file cabinets, etc.
Beyond equipment
Buying
equipment isn't the only way to reduce your taxes before the end of the
year. There are many other ways to accomplish the same goal while
benefiting your business.Here
are several other ideas to consider:
Throw a holiday party
for your employees
Unlike
other entertainment expenses, holiday parties or company picnics are fully
deductible. That’s because they work like an incentive to boost morale
and a company team spirit. About the only hitch is that you have to invite
all employees, and the parties do have to be special events, not a routine
occurrence.
Put your kids to
work on weekends and the holiday vacation
Make them earn the
money they spend on gifts instead of just giving it to them. You benefit
by converting a personal expense into deductible business expense (your
child’s salary) and by helping teach your kids the value of a dollar. If
your child is under the age of 18, the salary you pay them is not subject to social
security and Medicare taxes if your business is a sole proprietorship. The kids gain by making money
and learning real work skills that can help them get jobs elsewhere later
on. They can earn up to $4,400 tax free (for the year 2,000) and another
$2,000 on top of that if they put the extra $2,000 into a deductible IRA.
They also gain a sense of pride in having worked to make the money they
spend buying gifts for the family.Caveat:
the salary and job has to be reasonable. You would have a hard time
justifying paying your 7-year old $30 an hour to handle customer service
calls.
Give your retired
parents or in-laws a job during the holidays
This
presumes your retired parentswant
to work, are in a low income bracket and the amount they earn from you
won’t be more than the minimum they can earn before their social
security benefits become taxable. They benefit from the extra income they
earn, which is taxed at a lower rate than yours and from the satisfaction
they derive from contributing their skills and knowledge to your success.
You get to deduct money you might otherwise just give to your parents if
they are in financial need.
Fund your retirement
If
you haven't already done so, be sure to set up a qualified retirement plan
if you're self-employed. If you want to use a KEOGH plan, you'll need to
get it set up before the end of the year. You can set up a SEP or SIMPLE
plan up until the time you file your tax return for 2000. However, the
sooner you put money in the plan the faster it starts earning tax-deferred
interest.
Janet Attard is the
author of The Home Office and Small Business Answer Book (Published
by Henry Holt & Company) and of Business Know-How: An Operational Guide for Home-Based and
Micro-Sized Businesses With Limited Budgets (published by Adams Media,
Inc.) Look for the books at your favorite bookseller, or click here to order.
The information compiled on this site is
Copyright 1999-2009 by Attard Communications, Inc. and by the individual authors.
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Phone: 631-467-8883.
